Expect return on equity to be constant rate

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Suppose investors in Proctor and Gamble have a 7% cost of equity. Based on Analysts’ forecasts you expect Proctor and Gamble to have earnings per share of $3.80 in one year and earnings per share of $4.20 in two years. After two years you expect return on equity (ROE) to be a constant rate of 16% per year. Every year you expect Proctor and Gamble to payout 75% of earnings as dividends. Additionally, Proctor and Gamble currently has book value of equity per share of $21. What price should Proctor and Gamble trade at today rounded to the nearest dollar? You should assume that after year 3 the sustainable growth rate will be constant, the payout ratio will be constant, and return on equity (ROE) will be constant. Your answer should be numeric only without the dollar sign. (Example an answer of $25.10 would be entered as 25; an answer of 25.50 would be entered as 26)

Reference no: EM131303486

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